A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

January 12, 2016

The Blockchain and Open Innovation

Transformational innovations don’t always play out as originally envisioned.Once in the marketplace, they seem to acquire a life of their own.Lest we forget, the Internet started out as a DARPA sponsored project aimed at developing a robust, fault-tolerant computer network.ARPANET was launched in 1969, and by the mid-1980s, it had grown and evolved into NSFNET, a network widely used in the academic and research communities.And, the World Wide Web was first developed by Tim Berners-Lee at CERN in the late 1980s to facilitate the sharing of information among researchers around the world. They’ve both gone on to change the world, - to say the least.

The blockchain first came to light around 2008 as the architecture underpinningbitcoin, the best known and most widely held digital currency.But, as with the Internet, the Web and other major technologies, the blockchain has now transcended its original objective.It has the potential to revolutionize the finance industry and transform many aspects of the digital economy.

Two press announcements released in mid-December are serious milestones in its evolution. Let me explain.

The Internet and World Wide Web introduced a culture of standards to the IT industry.Until the early 1990s, it was quite difficult to get different IT systems to talk to each other.Just sending an e-mail across two different applications from two different vendors was quite a chore, as was sharing information across disparate systems.

Then in the 1990s, the open Internet protocol, - TCP/IP, - was widely embraced by the general IT marketplace, making it possible to interconnect systems and applications from any vendors.Internet e-mail protocols, - SMTP, MIME, POP, IMAP, - enabled people to easily communicate with anyone on any system.At the same time,the Web’s open set of standards, - HTML, HTTP, URLs, - and the easy-to-use, graphical Mosaicweb browser, - enabled any PC connected to the Internet to access information on any web server anywhere in the world.

Much of the success of the Internet and Web are due to the international organizations created to oversee their evolution, - IETF, the Internet Engineering Task Force, and W3C, the World Wide Web Consortium, founded in 1989 and 1994 respectively.Similarly, Linux has been successfully overseen by the Linux Foundation, whose antecedent organizations were established in 2000.More recently, the cloud community came together to develop OpenStack, an open source cloud computing platform, and in 2012 founded the OpenStack Foundation.In addition to developing standards and organizing promotional activities, these various organization make available open source implementations of their software releases, thus encouraging collaborative, open innovation.

In the last few years, the blockchain has been gathering momentum beyond its original bitcoin role, -promising, in particular, to propel the ledger to the Internet age.Ledgers constitute a permanent record of all the economic transactions an institution handles, whether it’s a bank managing deposits, loans and payments; a brokerage house keeping track of stocks and bonds; or a government office recording births and deaths, the ownership and sale of land and houses, or legal identity documents like passports and driver licenses.They’re one of the oldest and most important concepts in finance and other mission critical transaction applications.

A 2014 report by the Bank of England notes that the classic ledger that’s been long used in payment systems has not changed much since the 16th century.Financial institutions have transformed their paper-based ledgers into highly sophisticated IT applications and data bases, but while their ledgers and transaction applications are now digital, their underlying structure has not changed much. Each institution continues to own and manage its own proprietary ledger, synchronizing its records with those of other institutions as appropriate, - a cumbersome process that often takes days. As the Bank of England reminds us, for this system to work, “people must trust that these centralized ledgers will be maintained in a reliable, timely and honest manner.”

With a blockchain-based financial system, users own their personal assets and payments are made directly between payer and payee, removing the risk that a financial institution may become insolvent.The main responsibility of the institutions involved is to oversee the trustworthiness, security and efficiency of the distributed ledger system, ensuring that the cryptographic technologies and protocols have been properly implemented. And, like the Internet, such a distributed system should be significantly more resilient than our current banking systems, given the large numbers of redundant blockchains and pathways in the network.

The blockchain offers a way for ledgers to now follow the collaborative, distributed, standard-based approach of the Internet and other major digital innovations, enabling financial institutions “to implement a fully decentralized payment system, in which copies of the ledger are shared between all participants, and a process is established by which users agree on changes to the ledger (that is, on which transactions are valid). Since anybody can check any proposed transaction against the ledger, this approach removes the need for a central authority and thus for participants to have confidence in the integrity of any single entity.”

On December 17, R3 CEV, a consortium of banks working on blockchain standards announced that 42 banks have now joined its distributed ledger initiative, including most of the world’s global banks.Starting in January, R3 plans to invite the broader financial services community to join the initiative.In a separate press release the same day, the Linux Foundation announced a new collaborative effort to develop an enterprise grade, open source distributed ledger framework based on blockchain technologies.R3 and a number of banks have committed to join this project, as have several technology companies including Accenture, Cisco, IBM, Intel and VMware.

“Many of the founding members are already investing considerable research and development efforts exploring blockchain applications for industry,” said the Linux Foundation announcement. “IBM intends to contribute tens of thousands of lines of its existing codebase and its corresponding intellectual property to this open source community. Digital Asset is contributing the Hyperledger mark, which will be used as the project name, as well as enterprise grade code and developer resources. R3 is contributing a new financial transaction architectural framework designed to specifically meet the requirements of its global bank members and other financial institutions…”

“With distributed ledgers, virtually anything of value can be tracked and traded.The application of this emerging technology is showing great promise in the enterprise.For example, it allows securities to be settled in minutes instead of days.It can be used to help companies manage the flow of goods and related payments or enable manufacturers to share production logs with OEMs and regulators to reduce product recalls…”

“Distributed ledger systems today are being built in a variety of industries but to realize the promise of this emerging technology, an open source and collaborative development strategy that supports multiple players in multiple industries is required.This development can enable the adoption of blockchain technology at a pace and depth not achievable by any one company or industry. This type of shared or external Research & Development (R&D) has proven to deliver billions in economic value.”

It’s too early to know if the blockchain will become another major transformational innovation.But these two recent announcements represent a serious milestone in that direction.As we’ve seen with other successful innovations, collaborations among its technology developers and users are absolutely necessary to get the architecture right, as are open standards, open source implementations, and a governance process embraced by all.In a short number of years, the blockchain has already transcended its original objectives.It will be very interesting to see how it all plays out in the years to come.